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In January 2004, the Office of the Comptroller of the Currency (OCC)--the federal supervisor of federally chartered or "national" banks--issued two final rules referred to jointly as the preemption rules. The "bank activities" rule addressed the applicability of state laws to national banking activities, while the "visitorial powers" rule set forth OCC's view of its authority to inspect, examine, supervise, and regulate national banks and their operating subsidiaries. The rules raised concerns among some state officials and consumer advocates. GAO examined (1) how the rules clarify the applicability of state laws to national banks, (2) how the rules have affected state-level consumer protection efforts, (3) the rules' potential effects on banks' choices of a federal or state charter, and (4) measures that could address states' concerns regarding consumer protection.

In the bank activities rule, OCC sought to clarify the applicability of state laws by relating them to certain categories, or subjects, of activity conducted by national banks and their operating subsidiaries. However, the rule does not fully resolve uncertainties about the applicability of state consumer protection laws, particularly those aimed at preventing unfair and deceptive acts and practices. OCC has indicated that, even under the standard for preemption set forth in the rules, state consumer protection laws can apply; for example, OCC has said that state consumer protection laws, and specifically fair lending laws, may apply to national banks and their operating subsidiaries. State officials reacted differently to the rules' effect on relationships with national banks. In the views of most officials GAO contacted, the preemption rules have had the effects of limiting the actions states can take to resolve consumer issues, as well as adversely changing the way national banks respond to consumer complaints and inquiries from state officials. OCC has issued guidance to national banks and proposed an agreement with the states designed to facilitate the resolution of, and sharing information about, individual consumer complaints. Other state officials said that they still have good working relationships with national banks and their operating subsidiaries, and some national bank officials stated that they view cooperation with state attorneys general as good business practice. Because many factors, including the size and complexity of banking operations and an institution's business needs, can affect a bank's choice of a federal or state charter, it is difficult to isolate the effects, if any, of the preemption rules. GAO's analysis of OCC and other data shows that, from 1990 to 2004, less than 2 percent of the nation's thousands of banks changed between the federal and state charters. Because OCC and state regulators are funded by fees paid by entities they supervise, however, the shift of a large bank can affect their budgets. In response to the perceived disadvantages of the state charter, some states have reported actions to address potential charter changes by their state banks. Measures that could address states' concerns about protecting consumers include providing for some state jurisdiction over operating subsidiaries, establishing a consensus-based national consumer protection lending standard, and further clarifying the applicability of state consumer protection laws. The first two measures present complex legal and policy issues, as well as implementation challenges. However, an OCC initiative to clarify the rules' applicability would be consistent with one of OCC's strategic goals and could assist both the states and the OCC in their consumer protection efforts--for example, by providing a means to systematically share relevant information on local conditions.

Recommendation for Executive Action

Status: Closed - Implemented

Comments: OCC analyzed a Supreme Court decision regarding preemption and has discussed the decision and the principles OCC applies to case-by-case preemption determinations at meetings with state officials and consumer groups. Also, in June 13, 2007 congressional testimony, the Comptroller of the Currency described four steps OCC has taken to maximize consumer protection benefits for bank customers: (1)executing memoranda of understanding between OCC and state bank supervisors to share information about consumer complaints, (2)creating an electronic complaint sharing process to help transfer misdirected complaints and referrals between OCC and other federal and state banking regulators, (3) creating a new website for customers to use as a reference in determining which agency regulates their banking institution and what consumer protections are afforded them, and (4) conducting parallel examinations with state bank supervisors in instances where a national bank that is regulated by OCC uses an independent mortgage broker that is regulated by the state.

Recommendation: The Comptroller of the Currency should undertake an initiative to clarify the characteristics of state consumer protection laws that would make them subject to federal preemption. Such an initiative could serve as an opportunity for dialogue between OCC and the states on consumer protection matters. For example, OCC could hold forums where consumer protection issues related to federal and state laws could be discussed with state officials and consumer advocates. This could improve communication and coordination between OCC and state officials with respect to the impact of the preemption rules on the applicability of state consumer protection laws and could also assist both OCC and the states in their consumer protection efforts.

Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency